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US bank regulatory rollback law heads to Trump's desk

The U.S. House of Representatives voted 258-159 to pass a bill that would revise large swaths of the Obama-era, post-crisis banking regulatory law known as Dodd-Frank.

The May 22 House vote on S.2155 was the final hurdle for a yearslong push from congressional Republicans and a handful of moderate Democrats to pare back regulations on community banks, although some argue that the bill offers too many concessions for large regional banks.

White House staff will recommend that President Donald Trump sign the legislation.

The House did not make any changes to the legislative package, which was sponsored by Senate Banking Committee Chairman Mike Crapo, R-Idaho, in conjunction with 17 Democrats. The full U.S. Senate approved the bill in mid-March.

Thirty-three Democrats joined the GOP to help the bill pass. Only one Republican, Walter Jones of North Carolina, voted against the bill.

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With the bill now one signature away from becoming law, a number of questions remain about how the bill will be implemented and whether more financial regulatory reform should be expected.

Implementation of SIFI threshold

The legislation moves the threshold for enhanced prudential regulation from $50 billion in assets to $250 billion, but there is some uncertainty about how quickly the Federal Reserve will be able to make the change.

The bill would immediately exempt banks with between $50 billion and $100 billion from enhanced prudential standards, but it gives the Fed 18 months to decide whether it will continue to apply those standards to banks with between $100 billion and $250 billion.

Oliver Ireland, a partner at law firm Morrison & Foerster, said in an interview that he would expect the Fed to offer notice and comment on a public proposal detailing its approach to applying enhanced prudential standards.

"It's going to take some time, but they'll do it as quickly as they can do it," Ireland said, adding that the Fed may not provide relief far ahead of the 18-month deadline because of a backlog of other pending regulatory items such as the development of the stress capital buffer.

Compass Point analyst Isaac Boltansky said he would expect the Fed to at least calibrate risk management requirements and provide a CCAR exemption.

Capital relief for JPMorgan and Citi?

Although the bill does not include any major provisions that would change oversight of the U.S.-based global systemically important banks, one specific section concerning the supplementary leverage ratio, or SLR, may enable the Fed to offer relief for JPMorgan Chase & Co. and Citigroup Inc.

The bill would loosen the calculation of the SLR by no longer counting funds stored at central banks toward the ratio's denominator, allowing banks to either reduce capital or take on more debt while still meeting regulatory requirements. Although the bill was aimed at the three focused custody banks — Bank of New York Mellon Corp., State Street Corp. and Northern Trust Corp. — the law did not expressly exclude JPMorgan Chase and Citi, both of which also offer custodial services.

The Congressional Budget Office predicted a 50% chance that regulators would allow both companies to similarly adjust their SLRs.

M&A

Those in favor of the bill have criticized Dodd-Frank for harming community bank competitiveness and giving way to a flurry of mergers and acquisitions in the industry.

Dan Ryan, banking and capital markets leader at PricewaterhouseCoopers, said in an interview that he would expect "serious consolidation," initially among smaller banks, because companies no longer face regulatory ceilings at the $10 billion mark.

Ryan added that if the regulatory environment remains favorable for larger banks, a number of the supperregional banks could also strike deals.

"The gap between the biggest and the middle is going to get even bigger," Ryan predicted.

On May 21, Fifth Third Bancorp reached a $4.7 billion deal to buy MB Financial Inc., which one analyst described as a model for M&A in the new regulatory regime.

The other package

Although House Financial Services Chairman Jeb Hensarling, R-Texas, demanded more rollbacks in the bill, House GOP leadership ultimately yielded to Senate Democrats who threatened to stop the legislation if Hensarling made any changes. The House agreed to vote on S.2155 as-is on the condition that the Senate would take up a second financial services package bill.

But Hensarling has since acknowledged that Senate Democrats appear to have no appetite for another Dodd-Frank-related bill, adding that the second package legislation will largely focus on capital formation.

In an interview, Sen. Heidi Heitkamp, D-N.D., who helped engineer S.2155, said she has seen a list of bills that are on the negotiating table for the second package, most of which deal with securities.

But Heitkamp cautioned that a second financial services bill is not guaranteed.

"There was no quid pro quo in any way on this bill," Heitkamp said.